Porch Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated financial statements; amounts below are in U.S. dollars. Year-over-year comparisons are affected by acquisitions, including the addition of Porch’s Insurance operations.
Business context
Porch operates a home-services software and services platform. Beginning this quarter, it reported two segments: Vertical Software, which provides software and related services to home-services businesses and connects consumers with providers; and Insurance, which includes its insurance carrier, agency and home warranty activities.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $62.8m | $21.5m | $140.9m | $53.7m |
| Operating loss | $(12.6)m | $(3.8)m | $(65.0)m | $(22.2)m |
| Net loss | $(5.1)m | $(8.9)m | $(86.5)m | $(33.5)m |
| Adjusted EBITDA (loss), non-GAAP | $0.9m | $(1.4)m | $(18.6)m | $(14.3)m |
| Operating cash flow | Not separately provided in the supplied filing text | Not separately provided | $(41.7)m | $(17.0)m |
- Revenue increased 192% in Q3 and 162% in the first nine months. Management attributed growth to acquisitions and organic growth in moving, inspection and insurance.
- Q3 revenue comprised $42.3m Vertical Software and $20.5m Insurance. Segment adjusted EBITDA was $7.7m and $5.5m, respectively; Corporate and Other was $(12.3)m.
- Cost of revenue was 31% of revenue in Q3 versus 25% a year earlier, and 32% for the nine-month period versus 25%. Implied gross margin, calculated as revenue less cost of revenue, was approximately 69% in Q3 and 68% for the nine months.
- Q3 net loss narrowed year over year despite a larger operating loss, in part reflecting gains from remeasurement of the earnout and private warrant liabilities and an income tax benefit. The nine-month loss included $32.9m of losses from remeasurement of those liabilities.
- Stock-based compensation was $5.9m in Q3 and $29.4m in the first nine months, including substantial employee and CEO earnout-related expense.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $410.2m; restricted cash was $5.6m. Current assets were $713.4m and current liabilities $377.1m.
- Long-term debt carrying value was $418.0m, plus $0.1m current debt; principal debt outstanding was $429.6m. Debt included $425m of 0.75% convertible senior notes due 2026, a $4.0m line of credit and other notes. The notes’ effective interest rate was 1.3%. The company repaid the $4.0m line of credit in November 2021.
- In September, Porch issued the 2026 Notes for approximately $413.5m net proceeds, repaid its senior secured term loan and purchased capped calls for $52.9m. The capped calls are intended to reduce, but do not eliminate, potential dilution, subject to a cap.
- For the first nine months, operating cash use was $41.7m, investing cash use $184.7m—primarily acquisitions—and financing cash provided was $434.8m. Cash, cash equivalents and restricted cash increased $208.4m.
- Management stated that cash and cash equivalents at September 30 were sufficient for operations, planned capital expenditures, working capital and debt service for at least 12 months, based on its current operating and growth plan. It noted that future acquisitions or growth may require additional capital.
Material changes, outlook and risks
- 2021 acquisitions included V12 Data, Homeowners of America, Rynoh and American Home Protect, for reported total consideration of $246.3m. These acquisitions added insurance and warranty operations as well as software and data services. Acquisition fair values remained preliminary.
- In October 2021, Porch acquired mortgage software provider Floify for $86.5m, including cash and stock. A stock-value guarantee could require additional shares or cash if specified shares retained by sellers do not double in value by the end of 2024.
- Management reported weather-related losses in the HOA insurance business as one factor contributing to weaker nine-month adjusted EBITDA. COVID-19’s future effects on revenue and operations remained uncertain.
- Risks include insurance loss and reserve estimates, reinsurance collectability (one reinsurer accounted for 11% of reinsurance receivables), regulatory and privacy obligations, and litigation. The filing says potential losses in the TCPA matters could not be estimated; a wage-and-hour matter had a tentative settlement pending documentation and court approval.
- Disclosure controls were not effective as of September 30 because of previously reported material weaknesses in internal control over financial reporting. Management described remediation efforts but cautioned that success was not assured. Porch expected to lose emerging growth company status at year-end 2021, bringing additional reporting and audit requirements.
- The filing provided no specific revenue or earnings guidance. Management’s liquidity statement is an assessment, not a forecast of results.
Important facts for investors to verify
- How much reported growth is organic versus acquired, and whether acquired businesses can sustain their contribution and achieve expected integration benefits.
- Insurance underwriting results, catastrophe/weather exposure, reserve adequacy, reinsurance recoverables and concentration by reinsurer and geography.
- Cash-burn trajectory and acquisition spending relative to management’s stated 12-month liquidity assessment; terms and potential dilution or cash settlement of the 2026 Notes.
- Non-GAAP adjusted EBITDA reconciliation and the effect of stock compensation, earnout and warrant remeasurement, and acquisition costs on reported results.
- Progress in remediating internal-control weaknesses, and the status and possible financial effect of material legal matters.